Nestle India Ltd’s June quarter results (Q2CY21) were not appetising. This at a time when the base effect was favourable, given that the year-ago quarter was hit hard due to disruptions caused by nationwide covid-19 lockdown.

Nestle India follows a January to December financial year and the June quarter is its second.

The packaged foods company’s revenues for the June quarter rose 13.8% year-on-year to Rs3,477 crore. For perspective: revenues in Q2CY20 had grown just 2% year-on-year. Credit Suisse Securities (India) Pvt. Ltd said Q2CY21’s revenue performance implies a 7.7% 2-year CAGR, which is a moderation. CAGR is compound annual growth rate.

“While Nestle's growth rate is healthy, the company is no longer the outlier within the FMCG industry, as it was over CY16-20 when it grew ahead of all other FMCG companies," said Credit Suisse analysts in a report on 28 July. FMCG refers to fast-moving consumer goods.

Commenting on Nestle India’s results, an Emkay Global Financial Services Ltd report said, “The step-up in innovation and the distribution push seem good, but are yet to drive further improvement in growth as per expectations."

Nestle derived more than 95% of its revenues from domestic sales and the rest come from export sales. Domestic sales rose 13.7% year-on-year last quarter and were largely driven by volume and mix. E-commerce channels put up a robust show, growing by 105% and contributing 6.4% of domestic sales. While export revenues grew at a faster rate of 17.7%, note that this comes on a lower base.

Even as revenue performance has been underwhelming, it is not as if margins have impressed. Commodity prices have been rising across oils and packaging materials and this affects Nestle India as well. For the June quarter, gross margin rose 62 basis points year-on-year, but the measure is 157 basis points lower vis-à-vis the March quarter. One basis point is 0.01%. Ebitda margin, however, contracted year-on-year, primarily owing to higher other expenses.

Meanwhile, Nestle India has already invested Rs1,000 crore so far out of its capex plan of Rs2,600 crore over a 3-4 period. “While this is necessary for the long-term growth of the company, it could have an adverse impact on near-term earnings as capacity utilisation will take a few years to ramp up. There could be some pressure on earnings due to the rise in depreciation and other costs related to starting up new capacities," said Credit Suisse’s analysts.

To be sure, shares of Nestle India have meaningfully underperformed the broader Nifty 50 index in the past one year. But valuations aren’t cheap with the stock trading at around 60 times estimated earnings for calendar year 2022. According to Emkay, the valuation is not attractive. “The weak margins make us cut CY21-23E earnings per share marginally by 2-4%," points out the broker.